The global trade war and what it means for steelmakers and miners

Tensions are high between the international community and the US, with a global trade war on the horizon. While the story is just beginning to unravel, it started with President Trump’s trade tariffs on steel and aluminium. So what does it mean for steelmakers and miners?

‘Today I’m defending America’s national security by placing tariffs on foreign imports of steel and aluminium,’ – US President Donald Trump speaking in March.

The US is the largest importer of steel in the world and has long had a deep trade deficit that has made it reliant on foreign imports. As steel plants across the US succumbed to stiff foreign competition from cheaper production in emerging markets, particularly in Asia, the US steel industry slowly withered as manufacturing moved abroad.

This trend has seen China become a commodity powerhouse, both producing and consuming a huge amount of metals. China accounted for about one-third of global steel production in 2005 but now manufactures almost half, and exports nearly triple the amount than its closest competitor - Japan. Its trade surplus in steel is also three times the size of any other country, while the US boasts the largest trade deficit.

However, while the Chinese economy continues to grow at a rapid rate, it has slowed, which means less demand for steel from key industries like construction or infrastructure. Coupled with its growing production levels, steel exports grew and led to an over-supply in global markets.

China’s economic growth has long been at the top of the commodity industry’s list of risks, but this is changing. A 2018 survey by industry trade body UK Steel showed that the industry is now more concerned by the impact of US protectionism than the state of the Chinese economy.

Flying in the face of globalisation, Trump believes the industries that have moved overseas in recent decades (in order to stay up with the competition) should return home, and that the US should be built using US goods. Put simply, he believes that making foreign imports more expensive will encourage more firms to make steel in the US, restoring the swathe of jobs lost across his favoured Rust Belt and delivering a key election pledge.

The move is likely to provide a boon (in the short-term at least) to those producing steel in the US, but the implications go much further. The decision will shift supply destined for the US to other markets, placing pressure on prices in places like Europe and Asia. The effect of Trump’s decision will ripple through global markets, with steel being a vital ingredient for so many key industries, including construction, automotive, transport, infrastructure, engineering and aerospace.

US imposes trade tariffs on steel and aluminium imports

Trump ordered an investigation into how steel and aluminium imports were impacting national security only months after coming into office in April 2017. In March 2018, almost a year later, Trump introduced a 25% levy on steel and a 10% levy on aluminium that was imported into the US, but he provided temporary exemptions to its closest allies including Canada, Mexico, South Korea and the EU.

This was because Trump was initially trying to target China, which despite producing almost half of the world’s steel only exports a nominal amount to the US. However, tariffs were just the start of its brewing trade war with China – which you can read more about here.

International partners were expecting to be permanently excluded from Trump’s steel and aluminium tariffs, but received a shock when Trump announced they would now apply to all countries, including allies that had previously been exempt on a monthly-rolling basis.

Trump has justified the trade tariffs on the grounds of national security, sparking outrage amongst international leaders at a time when the US is trying to renegotiate the North American Free Trade Agreement (NAFTA), liberalise trade with the EU, and secure support amid political tensions with Iran and North Korea.

Trump is not the first American leader to have targeted imports in attempts to revive the ailing steelmaking industry. Against a similar backdrop of surprise, President George W Bush imposed tariffs of 8%-30% on several types of imported steel in 2002 (targeting imports from Asia and Russia), in an effort to help the industry. However, while providing a short-term boost to domestic steelmakers, this failed to stem the job losses over the longer term and simply pushed up the cost of core ingredients for other major industries like car manufacturers and had to be overturned.

US steelmakers applaud Trump’s trade tariffs against unfair imports

The US is the biggest importer of steel in the world – it imports 15% more steel than the second largest importer (Germany). Last year the US imported 34.6 million metric tonnes of steel, but had an overall trade deficit of 24.6 million metric tonnes, showing the chasm between demand and production. This has been driven by the growth in steel supplies from lower-cost countries like China, which priced out US producers that are predominantly concentrated in Trump-supporting states.

Although the US is home to some of the largest steelmakers in the world such as Nucor, US Steel and ArcelorMittal, steel imports into the US have more than doubled since the financial crisis.

Echoing the sentiment among the industry under Bush in 2002, US steelmakers have long been calling for the government to address the damage suffered by the sector as a result of what they call ‘cheap imports from major foreign competitors’. Trump’s trade tariffs have been welcomed by the country’s domestic steel industry, which was already supporting the president following his cuts to corporation tax and the wave of government spending promised under his infrastructure plan.

Where does the US source its imported steel?

The US imported steel from 85 countries in 2017, demonstrating the international nature of the market. However, over three-quarters came from just nine countries, with Canada supplying 17% of all steel imports, followed by Brazil supplying 14% and South Korea giving 10%. The other top producers are Mexico (9%), Russia (8%), Turkey (6%), Japan (5%), Germany (4%) and Taiwan (3%).

Notably, the US sourced more steel from the likes of Taiwan than it did China - the main target of Trump’s trade tariffs. China supplied just 2% of all steel imports into the US last year, and that was down almost 5% from 2016. Meanwhile, US imports from the world’s other huge emerging economy, India, more than doubled year-on-year.

With steel boasting such a wide range of applications, steelmakers produce a variety of products that are categorised into five main segments. This is important to understand, as the price of products can vary dramatically and because the US sources different products from different countries.

The difference in steel products explained

Below is a breakdown of flat, long, semi-finished, stainless, and pipe and tube steel products produced around the world:

Flat products: produced by rolling semi-finished steel through varying set of rolls. Includes sheets, strips and plates. Used most often in the automotive, tubing, appliance, machinery and manufacturing sectors.

Long products: steel products that are outside the flat product category. Includes bars, rails, rods and beams. Used in a lot of sectors but commonly in construction.

Pipe and tube products: either seamless or welded pipe and tube products. Used in a lot of sectors but commonly in construction and energy sectors.

Semi-finished: the initial, intermediate solid forms of molten steel, which are then re-heated and further manipulated into a finished steel product. Includes blooms, billets, slabs, ingots, and steel for castings.

Steel mill products: carbon, alloy, or stainless steel produced by either a basic oxygen furnace or an electric arc furnace. Includes semi-finished steel products and finished steel products.

US steel imports: where does it source different steel products?

Below is a chart showing where the US imports different steel products from around the world:

Canada, Mexico and Brazil steel exports rely on US market

The US may be reliant on steel imports, but this means that its biggest partners are also heavily dependent on the US for exports. Canada, Brazil, Mexico and Turkey all export steel to the US more than any other country – and 90% of all the steel exported out of Canada heads to its southerly neighbour. Similarly, 65% of all steel exports out of Mexico head north to the US.

Below is a chart showing the share of total steel exports that went to the US in 2016 and 2017 (with the rank representing importance to the country. For example, rank one means that the US was the number one export market for that country):

Once again it is hard to miss how little steel is imported to the US directly from China. However, steel can often pass through intermediate countries several times as it is made, forged and sold in different countries, much like other products such as cars. And China is the largest source of global indirect steel exports, while the US tops the list for the most indirect imports.

Trade tariffs: steelmakers and mining stocks

Below are some steel making and mining stocks that will be impacted by the tariffs. Steel is one of the most crucial metals used around the world. Its use in construction, energy and transport means that it is heavily linked to global growth and is a core ingredient of national government policies on matters like infrastructure and industry. Rapidly growing countries like China have therefore been integral to steel markets by providing growing demand for steel, and the introduction of Trump’s huge infrastructure investment plan will be a boon for steelmakers if and when it starts to be rolled out.

Importantly, steel is not taken directly from the ground by miners like gold or copper. It is an alloy that is based primarily on iron. Mining companies extract iron ore and must reduce these ores using carbon to turn iron into steel. About three-quarters of all steel is made by mixing the iron ore with carbon from metallurgical coal (also known as coking coal) with the rest made using an electric arc furnace, which does not use either of the two primary raw materials but instead recycles scrap steel and other types of iron.

It is important to remember that although coal widely used to create steel, metallurgical coal is not the same as thermal coal, which is the coal used to produce energy. However, electric arc furnaces are extremely energy-intensive and require a lot of electricity and many are often powered by plants that are fed thermal coal.

Nucor: the largest and most diversified steelmaker in the US

Nucor is the biggest steel company in the US and one of the biggest in North America. The firm produces carbon steel, fasteners, alloy steel, and finished steel products as well as raw materials which are used for/in heavy equipment, automobiles, energy generation, oil and gas, transportation, and construction.

The company leverages the niche diversity of its product portfolio by focusing on supplying domestic customers, mostly manufacturers and industrial firms. It does, however, have joint ventures in countries like Italy and Mexico, and an international sales operation. It has already been investing in the US in preparation for the domestic growth it expects, spurred on by the tariffs. Earlier this year it announced plans to construct a $240 million rebar steel mill in Florida.

US Steel: idle capacity firing up in response to steel tariffs

US Steel focuses on producing high quality, value-added sheet and tubular steel products for a range of industries, supplying customers throughout the world primarily in the automotive, consumer, industrial and oil country tubular goods (OCTG) markets. Although the bulk of its operations are in the US, where it has the capacity to produce 17 million tonnes of steel per year, it also has 5 million tonnes of capacity at its integrated steel plant and coke production facilities in Slovakia.

The company has been forced to shut down some of its operations over the years as they became unprofitable due to global oversupply, but this means it has idle capacity it can fire up as the market improves. US Steel said it would restart the B blast furnace and steelmaking plants at its Granite City Works facility, in direct response to the trade tariffs on steel being announced, as it looks to capitalise on anticipated increases in domestic demand.

ArcelorMittal: the world’s largest steelmaker with a big US presence

ArcelorMittal is a world behemoth. It has steelmaking operations in 19 countries and is the largest steel producer in both North and South America, as well as Africa and the European Union, where it has sites in France, Germany, Belgium, Spain, Luxembourg, Poland, the Czech Republic and Romania. The firm is integrated with large iron ore and coking coal operations in countries like Brazil, Bosnia, Canada, Kazakhstan, Liberia, Mexico, Ukraine, and the US.

In 2017, around 37% of its crude steel was produced in the Americas, 46% in Europe and 16% in other countries. For perspective regarding its sales, the US accounted for around 21% of total revenue last year versus Europe at 50%.

The company has swathes of excess steelmaking capacity, and has been reducing this for several years. It is currently working toward the Action 2020 plan, where it aims to improve earnings by $3 billion by 2020 by growing volumes, improving its product mix and saving costs. Two years into the five year plan, ArcelorMittal has already delivered more than half of its target.

AK Steel: unique steel manufacturer in North America

AK Steel prides itself on being the only steel manufacturer to produce carbon, stainless and electrical steels, although it also offers other products and services like mechanical tubing and steel stamping.

Although it has a sales presence across Europe, sales to customers outside of the US have fallen for at least three consecutive years, generating $627.1 million in revenue in 2017 compared to the $5.45 billion made in the US. The automotive industry is by far the most important sector to the company, taking nearly two-thirds of the production, with the rest being used in either distributors, converters, or infrastructure and manufacturing.

The company claims that cheap foreign imports have threatened the electrical steel segment more so than any other type of steel, with electrical steel imports into the US ‘nearly doubling’ in 2017. Quite simply, AK Steel believes there is a reason why it is the only domestic manufacturer of electrical steel and electrical transformers left, following the exit of the only other producer in 2016.

In addition to its steelmaking facilities the company also has a subsidiary that is developing metallurgical coal reserves in Pennsylvania, in what would be the first step to becoming a more integrated firm.

Steel Dynamics: supportive of tariffs but more cautious over long-term implications

Steel Dynamics is a formidable producer and recycler of steel in the US, with additional operations south of the border in Mexico. In terms of product, over 60% of its production comprises of flat roll products. Regarding revenue, steelmaking is at the core, accounting for around three-quarters of it and supplemented with a substantial metal recycling operation.

Although it is positive following the introduction of Trump’s trade tariffs, its view on the effectiveness of previous tariffs (aimed at individual countries) should still hold true today.

‘When such tariffs, duties or quotas expire or if others are further relaxed or repealed, or if relatively higher United States steel prices make it attractive for foreign steelmakers to export their steel products to the United States, despite the presence of duties, tariffs or quotas, the resurgence of substantial imports of foreign steel could create downward pressure on United States steel prices,’ the company said in its 2017 annual report before the latest tariffs were announced.

Still, Steel Dynamics is willing to expand into the right areas, having recently announced plans to buy CSN Heartland’s flat roll operations, broadening its flat roll product portfolio with lighter gauges and greater width for north of $340 million.

Commercial Metals Co: focusing on steel manufacturing

CMC has a slew of steelmaking operations in the US and a strong European presence through its recycling, manufacturing and fabrication plants in Poland. The company has all but exited from its international marketing and distribution business, building on the sell-off of its raw materials unit in August 2017.

But it is clearly willing to invest in its manufacturing business after striking a deal in January to buy a US-based rebar mill and fabrication facilities from Gerdau for $600 million, and having launched commercial production at a new micro-mill in Oklahoma last December. The company believes that focusing on rebar and merchant bars separates it from rivals.

In 2017, CMC generated 71% of its net sales in the US, followed by Europe (15%), Asia (9%), and the balance sold in Australia, New Zealand and elsewhere.

Alcoa: bauxite, alumina and aluminium

Alcoa is a significant player in the bauxite space, with seven active mines spread worldwide, including four that it operates itself in Australia, Brazil, Guinea and Saudi Arabia. The US is its biggest market, accounting for about 46% of revenue, followed by Europe (Spain) at 28% and Australia at 20%.

Following its much improved performance in the first quarter (Q1) of 2018, Alcoa said it expected annual adjusted earnings to be $900 million higher than previously anticipated. It is projecting a global deficit for both aluminium and alumina this year, with bauxite supply and demand to remain balanced. With aluminium ‘steadfastly positioned to perform through commodity cycles’, Alcoa believes it will be able to drive better commodity prices to its bottom-line as a way to outperform its rivals.

Russel Metals: the North American steel distributor

Russel Metals distributes steel products across the entirety of Canada and the Southeastern and Midwestern regions in the US, sourcing the majority of its material from within North America. Sales are weighted to Canada, where it generates 70% of sales versus 30% from the US.

The company said it believed the tariffs would help margins for its main businesses, and the company has just acquired two US processing facilities from DuBose Steel.

Evraz: self-sufficient integrated steelmaker

Evraz is another sizeable steelmaker based in Russia, with additional operations in the US, Canada, the Czech Republic, Italy and Kazakhstan. It is almost completely self-sufficient in terms of raw materials through its own iron ore and coking coal operations. In addition, Evraz (31% of which is owned by Roman Ambramovich) is one of the world’s leading producers of vanadium, a key additive for steel.

Thyssenkrupp: rising export risks but sees growth opportunities

ThyssenKrupp has a swathe of technology and material businesses, with steel being the single biggest driver of revenue. In May, the company warned that its European steel arm was battling in an ‘extremely challenging’ environment because of both global overcapacity and ‘increasing export risks’ due to the trade tariffs.

Releasing its interim results, ThyssenKrupp said it was increasing sales from its processing business, offering warehousing and other services, adding there was ‘clear gains in materials warehousing and distribution in large parts of Europe and North America, and in international direct-to-customer business’.

Tenaris: providing pipes to the energy and industrial sectors

Tenaris predominantly supplies steel pipe and other products directly to the oil and gas industry, and to engineers that build projects, pipelines, processing and power plants on behalf of other firms. The company’s global presence has been built up through strategic investments over recent decades. Tenaris has steelmaking and other related facilities spread across 16 countries, supported by service and distribution arms in 25 countries.

The majority of its manufacturing sites are based in the Americas, with centres in Argentina, Brazil, Ecuador, Colombia, Mexico, the US and Canada. In Europe it has manufacturing sites in Scotland, Italy, Denmark and Romania. Other manufacturing plants are located in Nigeria, Saudi Arabia, Kazakhstan, Japan, Indonesia and China.

In its 2017 annual report Tenaris said the impact of the trade tariffs could lead to a ‘structural change’ in its most dynamic market, but said they are likely to be positive if they are successful at reducing imports into the US because of its large amount of US capacity.

Acerinox: stainless steel manufacturer with record earnings

Acerinox’s steel operations are more diversified in terms of location. Its US operations are centred in Kentucky, while its European plants are in Spain, with further distribution sites within the EU. It also manufactures stainless steel in South Africa and Malaysia.

While its performance in Q1 of 2018 was positive, the firm did admit that some material originally destined for the US had already been diverted and applied pressure on other markets in Europe and Asia. It opened a new factory in the US last October that is performing well, while in Europe it is tinkering with its operations to enable it to make better quality products, mainly through investing in new equipment.

Outokumpu: aiming to be the 'best value creator' of stainless steel

Outokumpu production is based in Finland, Germany, Sweden, and the UK, with additional sites across the pond in the US and Mexico and despite being a European company, it believes the biggest growth opportunities lie in the Americas. It also has a chrome mine in its home country of Finland which feeds its stainless steel operation.

In the US, Outokumpu claims to be a large player, with 20% of the US market and 21% of the market in NAFTA (US, Canada and Mexico). Still, Europe is by far its biggest market, accounting for two-thirds of total sales last year, with the Americas representing only 24%.

Rio Tinto, BHP Billiton and Anglo American

Rio Tinto owns the largest integrated iron ore operation in the world, based in the Pilbara region of Australia where it feeds China and other emerging markets, helping circumnavigate the US market. However, its array of aluminium smelters are more spread out, located in Canada, France, Australia, New Zealand, Iceland and Oman.

BHP Billiton also has an integrated iron ore operation in the Pilbara region of Australia, creating high grade hematite lump and fines products, complimented by its joint ventures with Mitsubishi Development and Mitsui & Co on some of the largest coking coal operations in the country.

Meanwhile, the location of Anglo American’s operations differ. It is the third largest exporter of metallurgical coal in the world, operating in Australia, Colombia and South Africa. Its iron ore mines are in South Africa and Brazil, the latter of which is also home to its nickel projects which predominantly feeds the stainless steel industry.

Meanwhile, investors can also look at smaller firms like Ferrexpo, a producer of iron ore pellets in Ukraine, that has an ideal base to feed both Europe and Asia. It sells all of its products out of sale sites in Baar, Dubai, Kyiv, Singapore, Shanghai & Tokyo. The miner plans to raise production to 20 million tonnes over the coming years from the current capacity of just over 11 million tonnes, dependent on cash flow.

Vale and Fortescue Metals

Vale produces more iron ore and nickel than any other company. Its steelmaking and iron ore operations are based in its home country of Brazil, where it has become the go-to partner for other firms that have entered the country, demonstrated by its joint ventures with firms like ThyssenKrupp. It also has nickel operations in Brazil, as well as Canada, Indonesia and New Caledonia. In Asia, it has interests in refineries in the likes of China, South Korea, Japan (and also the UK).

Despite being based on the same continent as the US, Vale only generates a tiny proportion of sales from exporting its products there – accounting for just 6% in Q1 of this year. About 58% of sales are made in Asia (mainly China and Japan), and more steel is sold to Europe (17%) than in Brazil (10%), implying strong demand for Vale’s steel in foreign markets compared to domestic.

Notably, Vale and BHP are both partners of the sizeable Samarco iron ore operation in Brazil, which is still closed following a fatal dam failure in 2015.

Fortescue Metals is focused on iron ore and also operates in the renowned Pilbara region of Australia, shipping its product to China. The company accounts for about 17% of all the seaborne iron ore shipped into China each year. Like its peers, the amount of emerging markets surrounding Australia (which continues to deliver reliable economic growth), such as India, Thailand, Vietnam and Indonesia means that there is no urgency to supply the US.

Although based in Australia, the miner is looking for more iron ore as well as other metals such as lithium, copper and gold overseas in Ecuador, Columbia and Argentina, which would diversify its geographical presence and product portfolio.

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